Part B things to remember

Question 1 – Macro Data

a) Comparative economic performance:

AU: Slight increase in GDP, applying slight inflationary pressures on price levels in 2011. Unemployment
remains unchanged, the slight increase in GDP/eco growth not substantial enough to forecast a decrease
in it.

China: Rapidly expanding economy, forecasted to slow in 2011, which will decrease inflationary pressures,
but not believed to have any adverse affects on unemployment. Similar in the US.

Japan: Decrease in GDP, marking a slowdown in growth, alleviating unemployment slightly. Similar in
Canada.

b) Relationship between Unemployment & Inflation

A relationship between unemployment and inflation exists due to the connection they both have with
GDP (economic growth).
GDP, by the expenditure method is made up of: Y = C + I + G + (X - M), any one of those components
increases will increase GDP. When there is an increase in GDP, there are upward pressures on
inflation/price levels and unemployment is usually alleviated by the extra jobs resulting for greater
economic activity. The reverse applies – a decrease in any of the components of GDP will have place
downward pressures on price levels/inflation and generally worsen unemployment rates.
This inverse relationship is, in the short term at least, explained by William Phillips by a trade off that
exists between the two economic objections of sustainable inflation and lowering unemployment. The
Phillips Curve illustrates this inverse relationship:
c) Macroeconomic Analysis – contemporary Issues in economy, trade, Gov’t policies

Contemporary Issues: GFC affect, apply to data given.

The GFC of 2007-2010 was a result of the ‘Subprime Mortgage Crisis’ and the holding of toxic assets by US
and EU financial institutions. It has contributed to the failure of key businesses, declines in consumer
wealth estimated in the hundreds of billions of U.S. dollars, substantial financial commitments incurred by
governments, and a significant decline in economic activity globally.
Besides Australia, which narrowly dodged most of the effects of the global phenomenon due to the
government regulations in place in the financial sector, the only other two economies to make(modest)
growth gains are the UK and USA. However, due to the fact the growth is not mirrored by substantial
unemployment alleviation (nor on the other hand inflationary pressures) can be attributed to:
- The fact that economic growth has most probably been stimulated by the government in the way
stimulus and rescue packages to citizens and the financial sector
o In terms of the stimulus cash given to citizens, there was an overwhelming trend to save
the cash given rather than spend it – which rendered the measure mostly obsolete, as it
was theoretically given in order to be re-injected back into the economy and stimulate
activity/growth
- The time lag that exists between these economic rescue measures and the flow on effect on the
rest of the economy

Trade
Trade being comprised of Exports and Imports, directly correlates to AD in the sense that Net Exports (X-
M) and during recessionary periods globally, imports (to the domestic economy) are less attractive,
making other economy’s exports harder to sell, therefore widening the gap between X & M  decreasing
net exports  decreasing GDP (slowing eco growth) which can be demonstrated, on that assumption, by
the figures shown by the US, Japan and China.
However, Australia having moved from the UK (& to an extent the US) as major trade partners to favour
Asian partners has enabled losses to not be as significant as they would have been otherwise.

Government Policies
Short term, demand-side, expansionary policies from 2009 onwards
Question Two – Macro Data

a) Major projected changes:

- Household Consumption – Increase by 0.7%
- Exports – Increase by 0.3%
- Imports – Increase by 1.5%
- Real GDP – Increase by 0.5%
- AUD – Decrease by $0.04
- CAD as %GDP – Decrease by 0.1%
- Employment – Increase by 0.8mil
- Unemployment Rate – Decrease by 0.6%
- CPI – Increase by 0.6%

Most importantly the increase in household consumption can be said to have significant influence on the
economic growth, the employment growth/unemployment rate decrease and CPI increase, mostly due to the
significant role consumption by household plays in the calculation of AD. Consumption increasing will increase
AD, which then decreases unemployment (as demonstrated) and places inflationary pressure as prices (also as
demonstrated).

b) Changes in Employment from 2010-2011

As it can be seen, it is expected that Employment is to be increase by 0.8mil & the unemployment rate by
0.6% - substantial improvement in labour market performance.
A major contributing factor to the improvement is once again, household consumption.
Consumption increasing will increase AD, which then decreases unemployment because greater AD levels
stimulates activity in the economy, simultaneously attracting more labour back into the market to cater
for the increase in demand levels across the economy and providing the means for further consumption –
wages being paid to households.
The short run significance of the Phillips curve is also demonstrated by the illustrated increase in CPI as
unemployment falls.

c) China continued growth despite GFC. Impact on Australia’s BOP? Net Exports? Factors contributing to
N.E?
Australia’s major export orientation – Raw materials
China demands – Raw materials  Trade fit between economies

Strong GDP increases indicates increasing consumption, stimulating the economy and the demand of
materials/goods for further consumption – therefore greater imports going into China – relating to AU
exports to the economy
Strong GDP increases as the name suggests – greater production – meaning increases in exports flowing
out of China, namely Australia.

As China GDP increases rapidly, the demand for AU raw materials increases, increasing AU GDP, and
assuming exports increase faster than imports  BOP improves as the CAD narrows.

From China’s GDP increases, increasing AU GDP, domestic consumption also increases, leading to an
increase demand for imports, which a great proportion come from China in the form of finished goods.

Exports & imports will increase in both China and AU, the issue for AU being that due to the demand for
our raw materials, as great as it may be from China, is not as valuable as the demand for China’s imports
into AU as finished goods  worsening the BOP, CAD widens.
 Data on table in confirmation of the above – YES, AD reasoning (much of the above is repeated, the
consumption, and export/imports figures)

The only mismatch comes from the %of Current Account Balance which is shown to fall – either because
of JUST exports being valued more than imports (possible increase in volume or commodity prices)

Factors affecting N.E – demand (contributed to by GFC, sudden shocks, wars, other economies lack of
resources), exchange rates, local production

d) AU thinks GDP is unsustainable, why? Contractionary fiscal policy, implications of economy?

Why would it be deemed unsustainable:
o Half %, rapid expansion, rapid unemployment decrease, rapid consumption increase, increases in
exports & imports indicating a strong int’l market, all leading to a cycle of increasing AD from
several components – all of which placing substantial inflationary pressures on the economy. It is
expected CPI will fall out of the 2-3% target by 2011 and therefore needs to be managed now, to
hold off the time lagged influences of the just mentioned cycle of increasing AD.

Contractionary Fiscal Policy is the increase in taxation or a reduction in gov’t spending, and due to the
AD inflationary pressures, the surplus of T > G would have to be quite substantial.
Cont. Fiscal Policy in this scenario would actually be affecting two separate portions of the economy:
on one hand, it would be increasing the surplus, dampening AD through a fall in the G component.
But it would also be redirecting funds, or a lack thereof, of funds away from business if there was to
be an increase in T, which would mean firms have less money to fund the greater production
necessary to keep up with demand, which would then have an affect on unemployment and therefore
consumption and imports - - all contractionary.

Contractionary policy may not be the only necessary action due to time lags and the limited affect it
would have, consider tightening monetary policy
Question 3 – Micro Question

a) Market structure aim:

It can be seen through the actions of Aboo Corp that it is aiming for a monopolistic structure.
A monopoly is a market structure with a single firm, restricted/blocked entry, unique product type.
Market relatively stable before its tactics to dominate market share/power, reasons involve: economic
advantages, the product is income elastic and by Aboo corp assuming market control, it removes
competition and therefore it controls price, and offsets demand volatilities for its own product.

b) Elimination of competition on efficiency:

Removal of competition would turn the demand elastic good into a demand inelastic good, as there
would be no other suppliers and the firm becomes a price maker.

As a price maker the firm is able to, and probably would, increase price irrespective of costs MC/AC, and
would be able to achieve supernormal profits, otherwise impossible in a free market competitive market.
As prices go up, less of the product would need to be sold (and then produced) to make the same previous
profits – less economic efficiency.

Even before the full monopoly situation is achieved, the corp is in a position to drop prices, in the short
term, to drop prices well below break even and therefore effectively drive out the competition from the
market as they could not match the price drop

c) Would customers benefit in the long term?

As an extension of the previous question, they would not.
Price maker – supernormal profits – inefficiency
It would only benefit them if it were being spent on R&D = better products

d) 3 ways Gov’t could intervene:

o ACCC intervention: watch dog of competition in industries
o Intervene by introducing a gov’t business to directly compete
o Purchase majority ownership of the corp